Public Bill Committee

[Sir Nicholas Winterton in the Chair]

(Except clauses 3, 5, 6, 15, 21, 49, 90 and 117 and new clauses amending section 74 of the Finance Act 2003)

Nicholas Winterton: I welcome all hon. Members to this further sitting of the Finance Bill Committee. It is another very pleasant day, and we had a wonderful weekend, so I hope that everyone feels duly rested and recharged for the political conflicts ahead.
We are making steady but not over-rapid progress on this important Bill, and we are still on schedule 3. I understand from the Clerk that we had hoped to complete consideration of the schedule on Thursday but, sadly, that did not happen and we have three groups of amendments to discuss this morning. I have selected amendment No. 26 to schedule 3 in the name of Her Majesty’s Opposition. I am not sure which member of the Opposition team will leap to his feet, but I shall take a gamble on it being Mr. Philip Hammond.

Schedule 3

Entrepreneurs’ relief

Philip Hammond: I beg to move amendment No. 26, in schedule 3, page 121, line 36, after ‘possession’, insert
‘, including a defeasible life interest,’.
I am pleased to hear that you had a good weekend, Sir Nicholas, although I learnt from my television screen on Sunday afternoon that it seemed to be more rainy in the north-west than the weather that we were enjoying in southern England. It might not have been so in Macclesfield, but it certainly was in Wigan.
The Committee will be pleased to know that the debate will be short, unless the Minister has something startling to say. The amendment is a simple probing amendment, and I make no claim to authorship. It would clarify a small technical point to which an outside professional body has drawn attention and make it clear that an interest in possession otherwise than for a fixed term could include a defeasible life interest. I have no great axe to grind one way or the other on whether a defeasible life interest is included in the Bill, but I understand from outside professional bodies that its drafting leaves them in some doubt whether a defeasible life interest is included or excluded. We therefore considered that it would be helpful to have definitive clarification from the Minister. I do not in all honesty believe that the Bill needs to be amended if the right hon. Lady can simply clarify the point for the benefit of the professionals who are interested.

Jane Kennedy: Well, here goes! Amendment No. 26 operates on the part of the schedule that determines when entrepreneurs relief is available to trustees. It seeks, in particular, to make it clear that a beneficiary with a defeasible life interest in an interest in possession trust may qualify for relief. I hope that I can demonstrate that the amendment is unnecessary, although I appreciate the spirit in which it has been moved. I am aware of the debate among interested parties about whether a defeasible life interest would be considered an interest for a fixed term and, hence, excluded from the entrepreneurs relief. I assure the Committee that the fact that a defeasible interest may be terminated at some point does not render it an interest for a fixed term. More fundamentally, the amendment does not provide a definition of defeasible life interest, so it would fail to provide the degree of clarification that it may be intended to achieve.
I hope that I have provided the help that the hon. Gentleman was seeking and that, having heard my remarks, he will withdraw his amendment.

Philip Hammond: I am grateful to the right hon. Lady for taking the amendment in the spirit in which it was moved. She has now placed on the record the Government’s definitive view on what the drafting means. I accept that the amendment is unnecessary and so beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Nicholas Winterton: For the information of the Committee, the weather in Macclesfield on Sunday was brilliant. We had blue skies over Macclesfield, as is appropriate. I took part in a seven-mile sponsored walk and it did me the power of good. I ended up with a pint of beer, which was very refreshing indeed.

Philip Hammond: I beg to move amendment No. 27, in schedule 3, page 122, line 31, leave out ‘as part of’ and insert ‘subsequently to’.

Nicholas Winterton: With this it will be convenient to discuss amendment
No. 28, in schedule 3, page 122, leave out lines 37 to 39 and insert
‘date of the disposal referred to in subsection (3)’.

Philip Hammond: Clearly, Macclesfield and Wigan are miles apart, Sir Nicholas.
Amendments Nos. 27 and 28 address a more substantive issue than the previous amendment. They would amend the wording of new section 169K of the Taxation of Chargeable Gains Act 1992, which deals with the associated disposal of assets that have been used in connection with the business of a partnership or a company, the interest in which is being disposed of by the individual. In order for an associated disposal to be eligible for entrepreneurs relief, two conditions have to be met. I particularly want to draw the Committee’s attention to condition B, which will be inserted by new section 169K(3), which states:
“Condition B is that the individual makes the disposal as part of the withdrawal of the individual from participation in the business carried on by the partnership or by the company or (if the company is a member of a trading group) a company which is a member of the trading group.”
That has been described as the lock, stock and barrel approach to the disposal of associated assets. The assets must be disposed of as part of the individual’s withdrawal from participation in the business.
My first point, which I hope the Minister will begin to clarify and to which we might return later, is that the definition is rather vague. What does “withdrawal from the business” mean? Presumably it does not mean simply the sale of the shares or of the partnership share, or ceasing to be employed in the business, because if it did it would say so. It has to be a more complex concept, and there is concern that it is not clearly defined. The point of withdrawal from the business will be important in determining whether the proceeds of the sale of an associated asset are eligible for taper relief, so I suspect that that will be the source of some future legal clarification in the courts if we do not get it right and make absolutely clear the precise meaning of withdrawal of the individual from participation in the business. Does it mean on the same day, in the same month or in the same year? Does it mean that at the time the individual undertook the first action, he was planning in his mind the second action as some kind of package concept? Is it a motive test? Those are important questions.
My understanding of the Bill is that an individual could not withdraw from the business, whether it is a company or a partnership, and dispose of the asset at a later date, because that would not be part of his withdrawal from the business. The Minister might tell us that there are certain cases in which withdrawing from the business and disposing of an asset at a later date would constitute part of the withdrawal from the business, but we need some clarity on what those circumstances will be.
I shall suggest a couple of examples. Let us suppose that somebody owned farm land that was farmed by a partnership of which he was a partner or by a company in which he was a shareholder, and that he chose to dispose of his interest in that partnership or company. He made that known to his partners or co-shareholders and they were unable to raise the financial wherewithal to buy his interest in the asset—the farm land—that is used in association with the business—so he allowed them to continue to use the asset, perhaps while they tried to raise the finance to buy him out.
One can envisage many similar scenarios, for example a GP in a GP partnership who wished to retire and cease to take an active role in the partnership, but whose partners were unable at that time to buy out his interest in the separately held asset—the premises in which the partnership operated. Partners in a small accountancy firm might be in the same position. One can think of many examples where the interest in the property will be retained until either a new partner joins the partnership or a new shareholder brings capital into the company, or the existing partners and shareholders are able to raise the capital to buy out the associated asset.
It is important that the Minister explains what is intended here—whether there is an intentional barrier to an asset used in association with a business being eligible for taper relief and if so, to what extent that barrier is intentionally erected. The Committee needs to know whether there are other cases, which the Minister has not signalled, where there would be intentional barriers to taper relief being available—in other words, a defect in the way the provision will work. The group of amendments simply remove the requirement for a disposal to be part of withdrawal.
We have debated whether any business asset should be eligible for entrepreneurs relief and the Minister made it clear that as a matter of policy that was not the Government’s intention. I do not seek to reopen that debate. The group of amendments requires that the disposal be made subsequent to the individual’s withdrawal from the business. That would not cover a situation wherein somebody continuing the business could sell the asset and benefit from taper relief, but it would cover a situation wherein somebody who is withdrawing from the business can retain the asset, allow it to continue to be used in the business and then obtain taper relief on its subsequent sale.
It is tempting to think of the asset always as land or buildings, but it might be plant and machinery, or intellectual property. The individual who is exiting might own the patent upon which a manufacturing business is built, or a brand name which the company will continue to use in trading. It is not uncommon that a business needs to establish continuity by continuing under a trade name or a brand image, even if it will not be allowed to do so indefinitely.
The qualifying requirement in subsection (4) is also amended to require that when the asset is disposed of, it has been in use during the preceding year for the purposes of the business. It will need to be owned by the individual claiming the entrepreneurs’ relief and to have been in use in the business, but the individual himself will not need to have been engaged in that business. That is the soft exit provision, which will allow a partner who is retiring in circumstances where his partners cannot buy out the asset to avoid cratering the business by insisting on a third-party sale. There are real practical reasons for such a provision and I hope that the Minister can clarify what the Government’s intentions are and how in practice we can avoid some of the pitfalls that I have outlined.

Stewart Hosie: My contribution will be brief, and it follows on from the points made by the hon. Member for Runnymede and Weybridge. Where a partner withdraws completely and can dispose of every asset immediately and fully, one would imagine that they would be able to benefit from the release. However, in the case that within the same financial year—this is not uncommon in small businesses—the business runs into difficulty and the individual is called back on a paid or consultant basis, have they breached the rules? Have they fully withdrawn, and will they still receive the relief that they initially anticipated receiving on withdrawal, although they have been called back in extremis? That is an important point. People have contractual obligations not to re-engage with another firm, but they may be called back to assist the partnership. Would the relief still apply in those circumstances?

Jane Kennedy: The hon. Member for Dundee, East makes a fair point, which I shall address in a moment. I can confirm that on Sunday afternoon, Liverpool, Wavertree, was deluged with what appeared to be a mini tornado, which was so serious that it interrupted the broadcast of a particular event that was taking place in Wigan, much to the consternation of my best beloved and eldest son, who was not engaged in gardening as I was, it being otherwise good weather.
Amendments Nos. 27 and 28 would alter the rules governing the disposal of assets associated with a business. In particular, they would remove the requirement for associated disposals to be made alongside the withdrawal of an individual from the business in question. As such, they would dilute the targeting of entrepreneurs relief.
The amendments are unnecessary. In constructing schedule 3, the Government have deliberately focused entrepreneurs relief on individuals who are disposing of all or part of their business.
The hon. Member for Runnymede and Weybridge asked what “withdrawal from the business” means. I invite him to look at page 122, line 32, which uses the expression,
“withdrawal... from participation in the business”.
That does not answer the point made by the hon. Member for Dundee, East, which I shall come to in a moment, but the expression means just what it states. There is no specific time limit—[Interruption]. I will explain: there will be opportunities for a case to be made on a case-by-case basis.
Asset disposal occurs as part of the overall process of withdrawal, either before or after the material disposal of shares or partnership interests. We have not imposed intentional barriers to entrepreneurs relief—that was never our objective. What we have deliberately focused on, however, is the provision of relief to individuals who withdraw from participation in a business. The eligibility criteria are not meant to replicate criteria for the old taper relief. It depends on the facts of the case, but it is possible for someone to withdraw from a business and make an associated disposal at a later date. If the disposal is linked to the withdrawal from participation, the individual may receive relief. We need to take a fair view of the case based on the facts.

Philip Hammond: What the right hon. Lady says sounds reasonable in general terms: there will be an opportunity for a case to be made, case by case, and the outcome will depend on the case. However, she is saying that no one will ever be sure. Will there be a pre-clearance regime, whereby someone intending to make a disposal and a subsequent associated disposal can obtain Her Majesty’s Revenue and Customs pre-clearance, so that that the disposal, in the circumstances that have been defined, will be eligible for entrepreneurs relief? There was a pre-clearance authorisation procedure under taper relief.

Jane Kennedy: I do not believe that to be the case. Clearly, an application for relief would be made. The case would have to be presented as I have described. There will be occasions when the facts of the case merit relief and other occasions when they do not. It is not fair for someone effectively to convert a business asset into an investment by holding on to an asset after leaving the business. The rules are flexible, as cases vary, so they need to cater for that. The key point, however, is that asset disposal—the disposal of shares or shares in a partnership—where relevant in the cessation of the business is all part of one overall event or process. I have accepted that the disposal does not have to take place all at one immediate moment.

Philip Hammond: The right hon. Lady said a moment ago that it would be unfair for a retiring partner or shareholder to be able to convert an asset into an investment asset and then secure taper relief on it. That will not happen, because of the provision that the payment of rent disqualifies someone from entrepreneurs relief. My examples were deliberately constructed to present examples where the partner, out of consideration as it were for the other partners or his co-shareholders, was prepared to leave an asset in the business, rather than destroy the business by insisting on selling it to a third party. He would not receive rent, so it would not be an investment because of the Bill’s provisions on rent.

Jane Kennedy: I believe that I am right in saying that the hon. Member for Gosport raised that issue when we began to debate entrepreneurs relief, and we will discuss it in greater detail in the next group of amendments—I hope that I will then have something to say that gives some comfort to the hon. Member for Runnymede and Weybridge. The key point is how and why the assets are being disposed of. In response to the hon. Member for Dundee, East, if a partner withdrew and sold everything, but was called back in the circumstances he described—I accept that that is not uncommon—they could still qualify for relief, if the facts of the case merited it. If a partner came back as an employee or consultant, that, too, would not prevent application for relief. There is some scope in the arrangements for the kind of case described and for application to HMRC.
The amendments would allow some individuals to withdraw from active participation in a business, but to continue providing assets to the business. As I said at the outset, I believe that that dilutes the targeting of the relief and is therefore undesirable. We do not believe that such a scenario is a desirable target for the benefits of entrepreneurs relief in general. The amendments would have the perhaps unintended consequence of restricting entitlement in cases where a business ceases trading, but the individual only disposes of their share of the business at a later date. Under the current rules, an associated disposal may qualify at the time that the business ceases, and the amendments would prevent relief from being due in such cases.
One final point on the clearance procedure, about which the hon. Member for Runnymede and Weybridge asked, may help. There is no clearance procedure beyond the normal procedures for engaging with the tax office. The facts cannot be determined in advance, but the issue was not a problem with retirement relief. There is no reason to think that it would be a practical problem now.

Philip Hammond: The right hon. Lady is right that the matter must be determined on the basis of the facts. My understanding of the pre-clearance regime under taper relief was that the facts were set out by the taxpayer or his advisers. In effect, the scheme that was to be undertaken was set out, and HMRC gave a pre-clearance on the basis of approval, subject to all the matters set out in the taxpayer’s statement being carried out. If the taxpayer deviated or the facts changed, the pre-clearance would be void. However, the fact that it all hinges on what happens does not mean that it is impossible to obtain pre-clearance. If it were, the whole concept of a pre-clearance regime would fall apart.

Jane Kennedy: I hear what the hon. Gentleman says, and I want to think carefully about his remarks and examples. I believe that the advice that I have been given is correct, but I want to test it against his remarks. I do not believe that the amendments are necessary for the reasons that I have explained. They would dilute the targeting of entrepreneurs relief. We will discuss a related issue under the next group of amendments, when we will examine this matter further, so I hope that he will withdraw the amendment.

Philip Hammond: I am not merely disappointed, but quite alarmed by what the Financial Secretary has said. I thought that she would explain how somewhere in the obscurity of the schedule, it was perfectly clear that a disposal at a later date in the circumstances that I outlined would be eligible for entrepreneurs relief. In fact, she has left me more concerned than I was at the beginning of the debate. She says that she is confident that her advice is right, but it is not clear what that advice is. I still have not heard whether a disposal a year or two years after an individual withdraws from a business, in the circumstances that I have set out, would be eligible for entrepreneurs relief.
We must avoid two things in this Committee. First, we must avoid creating more uncertainty in our tax system. The eight months since the pre-Budget report and the changes to the capital gains tax regime have been characterised by lack of certainty and clarity, which is hugely damaging to business interests. The thought of introducing complicated provisions, which are clouded with uncertainty as to what would, and would not, be allowed, and in what circumstances, and which apparently are not capable of being subject to a pre-clearance regime, fills me with horror.
I may be wrong, but I anticipate that on leaving the room after this sitting, I will hear from various professional bodies that they feel the same way. They will agree that there is a degree of uncertainty, which is becoming greater as the Financial Secretary attempts to answer the questions that are raised. I am very concerned about this issue. She has rightly observed that the next group of amendments touches on a similar area, but it is in this area that I wish to stand in the ditch. The next group of amendments merely pushes the envelope still further.
Will the Financial Secretary consider the following proposal and perhaps clarify the issue in the next debate? If there is no pre-clearance regime, if the provision is woolly because decisions will be made on a case-by-case basis, and if she cannot answer specific questions at the Dispatch Box about whether or not the examples I have given will qualify, for the sake of clarity will she consider giving an assurance that HMRC will publish specific guidance, with examples, showing cases where it would normally be expected that a disposal of an associated asset, after the withdrawal of an individual from that business, would be eligible for entrepreneurs relief?
Secondly, we must avoid inadvertently—I assume that this has been done through inadvertence, not malice—creating a situation in which the withdrawal of an individual from a business leads to the collapse of that business, because the other individuals are not in a position to acquire an asset that he holds and which is used in association with the business. That is not an uncommon structure, and it would be a disaster if we inadvertently created such a situation.

Jane Kennedy: The hon. Gentleman talks about a pre-clearance procedure. I understood that there was no general pre-clearance procedure. Assuming that the Bill receives Royal Assent, guidance will be published shortly. I want to think carefully about the hon. Gentleman’s remarks, particularly given the importance he attaches to this group of amendments, which is clearly based on his interface with those groups that have been talking to him about their impact.

Philip Hammond: While I fully accept that some of the amendments I have tabled to this schedule overtly seek to extend the envelope of eligibility, in amendment No. 27, I am trying to prevent our sleepwalking into excluding a group of situations which I do not think anyone wants to exclude. Because the Minister has engaged with that point, I shall seek leave to withdraw the amendment, but I give her notice that we will have to return to this point. I hope that she will consider carefully the examples that have been offered.
If I have missed something, and if the architecture of the Bill provides a perfectly clear answer, and the danger that I have highlighted does not exist—this is not a party political point—I will happily accept that. But if that danger does exist I hope that the Government are prepared to do something to address it. In that spirit, may I ask the Financial Secretary whether she would be prepared to give the Committee an undertaking that the guidance will be made available in draft before Report so that we can understand how the Government expect this to work?

Jane Kennedy: I give that undertaking, and I will make all due effort to ensure that that happens.

Philip Hammond: I am grateful to the Minister.
Emily Thornberry (Islington, South and Finsbury) (Lab) rose—

Nicholas Winterton: Order. Before the hon. Lady makes her intervention, I must say that I take a slightly dim view of the fact that someone who has just come into the Committee and not heard the argument should seek to intervene. However, she has a right to do so, and I am quite happy to call her to speak. I merely make that observation to the Committee.

Emily Thornberry: I fully intended to apologise to the Committee for missing part of the debate. The point I am about to make may already have been clarified, but I am keen to make it, because in certain quarters of my constituency, perhaps surprisingly, it causes some concern. In amendment No. 27, which I believe we are debating at the moment, I understand that after the word “possession”, the Opposition wish to insert “defeasible life interest”. I do not know whether that is still the position.

Nicholas Winterton: Order. The hon. Lady used the right amendment number, but the wording to which she refers was from the previous amendment, with which we have dealt.

Emily Thornberry: I am glad that matter has been dealt with, as it is a matter of concern. It seems to amount to the same thing.

Philip Hammond: In response to your earlier comment, Sir Nicholas, QED is the appropriate answer. If the hon. Lady reads the Official Report she will find that the Minister has replied very helpfully in respect of amendment No. 26, and clarified the point. I am genuinely grateful to the Minister. I hope that we can agree that no one is seeking to create a class of unintended losers. Goodness knows, this Government have understood that that is not a sensible thing to do. I look forward to seeing what the right hon. Lady brings forward, and I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Philip Hammond: I beg to move amendment No. 33, in schedule 3, page 125, line 41, at end insert
‘in respect of any period commencing on or after 6th April 2006’.

Nicholas Winterton: With this it will be convenient to discuss the following amendments: No. 35, in schedule 3, page 126, line 7, at end insert ‘and’.
No. 34, in schedule 3, page 126, line 13, leave out from ‘business’ to end of line 17.
No. 37, in schedule 3, page 126, line 24, at end insert ‘and’.
No. 36, in schedule 3, page 126, leave out lines 28 to 31.

Philip Hammond: New section 169P of the TCGA 1992 deals with the restriction imposed in respect of the disposal of an associated asset that has not been used entirely for business purposes throughout the period of ownership, or where rent has been received for the use of that asset. Although I touched on the provision in relation to the previous group of amendments, in this case, the situation is one where the asset during the period prior to cessation of or withdrawal from the business has been used not wholly for business purposes, or where rent has been received. The classic example used in such tax cases of an asset used not wholly for business purposes is that of a farm with a residential farm house on it. There can be no issue in principle that where an asset is used partly for non-business purposes, some form of apportionment must be made. That is a fair approach.
The problem is that there is no starting date for the period over which apportionment must be made. The wording appears to apply to a period beginning with the date when the asset is first acquired. That means that relief will be denied in some cases where common sense suggests that it should be available. The amendment suggests a start date—not quite plucked at random—of two years before the start of this tax year. Therefore, previous use of an asset would be disregarded provided that it has been in business use for the past two years and remains so until the point of disposal. The two years mirror the taper relief regime requirement. The measure is not susceptible to manipulation or avoidance strategies, as it is dependent on what happened in a previous period—the last two years. For the purpose of the clause, there is nothing that anybody can do now to change the status of an asset to claim some advantage. I hope that the Minister will respond to that substantive point.
The second problem in proposed new section 169P, is found on page 126 of the Bill, where four tests are set out. Tests (a) and (b) are defined by reference to the period in which the asset is in the ownership of the individual. Tests (c) and (d) are defined by reference to the period that the asset has been in use in the business. They are different tests, and it is easy to envisage—again, using the farm land example—an asset that may have been in use in a business for many years, but that may have been owned by the individual in question, perhaps through inheritance, for a significantly shorter period. There is an issue about those two different tests. 
If, for any part of the period that the asset has been in use in the business, the individual has not been involved in the carrying on of the business, or if for any period rent has been received, relief is proportionately denied. For example, in a farming business where the land is owned separately, if the individual inherits land but the land has been in use in the business for a longer period, entrepreneurs relief will be partially disallowed. It appears that even if the asset has always been used in the business, he will only be entitled to relief for the fraction of the gain that represents the fraction of his period of involvement in the business out of the total period of use of the asset in the business.
Let us put this into numbers. Let us say that a piece of farm land has been used by a farming business for a hundred years; if the current generation or individual inherited the land and became involved with the farming business five years ago, he would be entitled only to five one-hundredths of the gain eligible for entrepreneurs relief—that is how I and others outside the House read the Bill. I cannot believe that Ministers intend that. If there is some obscure provision that makes good this problem, I am sure that the Minister will tell us. Again, we need to hear what is policy and what is potentially a query or question mark around the drafting. Is it really the Government’s policy that if farm land has been used for a hundred years in association with a business, but the individual currently making the disposal has only been involved in the business for five years, only five one-hundredths of the gain are eligible?
Finally, where relief has to be apportioned, either because of the rental test or because of the ownership or involvement tests, there is a just and reasonable test for apportionment. To be fair, there are some bases for what is just and reasonable set out in new section 169P(5), but we need a commitment from the Minister to publish HMRC guidance about how the tests will apply. The tests set out in subsection (5) are vague, to put it mildly. They do not say specifically that every case will be a pro rata apportionment; they simply say that regard will be had to the various factors—length of time held and the period of involvement. We and practitioners need to understand how regard will be had to those factors and what formula will be applied. The Bill does not make that clear.
There are also a couple of issues in relation to amendment No. 34, which would deal with the rental issue by deleting reference to receipt of rental as a disqualifying characteristic. We understand that a property letting business is not in itself a trading business, but where the asset is used for the purpose of an associated trading business, it appears to be different. As the Minister will know, the acquisition of assets from outside the business to be used in conjunction with the business was positively encouraged by the taper relief regime, which allowed taper relief for such assets. An asset that is acquired and financed separately and let to a company or a partnership is a vital part of the financing strategy of many small businesses. It allows flexibility if partners change or if not all practising partners are able to invest in the asset.
The problem with the proposed new section is that its impact is retrospective. Even if the arrangements were changed and rent stopped being paid now, the lack of a start date, which I referred to earlier, means that that asset will forever be caught by the provisions. That needs to be considered very carefully in the context of how it undermines the financing arrangements that are often used in small businesses and of how it introduces added complexity.
In the document published to support the Budget note “Capital Gains Tax: Relief on Disposal of a Business (Entrepreneurs’ Relief)”, example 6 set out an a situation in which Mr. R has been a member of a trading partnership for several years. He leaves the partnership and disposes of his interest, realising gains of £125,000, all of which qualify for entrepreneurs relief. He also sells the partnership office building, which he owned outright but let to the partnership, realising a gain of £37,000. I hope that the Minister picks up on that point, because it is from the Treasury’s note. The note states:
“The disposal of the office building is ‘associated’ with Mr. R’s withdrawal from the partnership business, and the £37,000 gain therefore also qualifies for entrepreneurs’ relief (assuming there is no restriction on the amount of gain qualifying for relief as a result of non-qualifying use).”
The phrase in brackets suggests that the non-qualifying use is the payment of rent, but I suggest to the Financial Secretary that the term “let to the partnership” ordinarily implies that it was let for rent. The example given in the Budget note is at the very least extremely confusing, because it states that where the building has been let to the partnership, relief will be available unless there is a non-qualifying use, but the Bill states that any letting in the normal sense—for rent—will disqualify that asset entirely. Perhaps the Minister will consider those points and our concern about how that provision will distort and undermine financing structures commonly used in small businesses and once again, leave us with the tax system driving the business structure, which I think we all agree is not the optimum situation.

Jane Kennedy: The group of amendments would relax the conditions under which entitlement to entrepreneurs relief for associated disposals may be restricted. Those restrictions apply where an asset was only partly deployed for business use or where the asset or individual was involved in the business for only part of the qualifying period. Amendment No. 33 would apply those restrictions by reference to the situation after 6 April 2006, effectively disregarding anything that happened earlier. The hon. Member for Runnymede and Weybridge argues that we should effectively write off everything that happened before April 2006. However, where an asset was only partly in business use, we believe that it is right to restrict the relief, and that is part of how the relief is targeted. I shall address his point about rent received in the past shortly.
Amendments Nos. 34 to 37 would remove one of the restrictions entirely so that receiving rent for the use of an asset would not prejudice entitlement to entrepreneurs relief on that asset. When considering the extent to which an asset was used for business purposes, it is right to restrict the relief if the conditions for an associated disposal were only partly met. Where an individual receives rent for the use of an asset, the amount of entrepreneurs relief should be restricted. Where an individual is receiving rent in exchange for the use of an asset by a business, that is more akin to an arm’s-length investment and is not an appropriate target for relief.
However, the restrictions involve looking back over the entire period of ownership of an asset, which could involve substantial periods before the introduction of entrepreneurs relief in April 2008, as the hon. Gentleman has pointed out, and I acknowledge that that is considered by some to have overtones of retrospection. Amendment No. 33 seeks to mitigate that element by taking out of account that period of ownership before 6 April 2006.
The restriction in cases where rent was paid for use of the asset has also attracted adverse comment for a second reason. Receipt of rent, whether at a market rate or otherwise, did not result in any restriction on the availability of business asset taper relief on disposal of the asset in question. I acknowledge the concerns voiced by the hon. Gentleman. I am aware that the approach under the Bill differs from the taper relief treatment of assets provided in exchange for rent. The amendments would deal with that point by removing the restrictions altogether, but that approach is not appropriate.
As I said, the hon. Gentleman has touched on a legitimate concern regarding the receipt of rent, so although I do not believe that his amendments are the right way forward, I undertake to consider his case for disregarding rent received before April 2008 when assessing entitlement to entrepreneurs relief. The hon. Gentleman asked if guidance will be available. It will be, and I shall invite HMRC to publish draft guidance for consideration before we discuss the matter on Report, or sooner if possible.

Mark Field: I thank the Minister for making that concession in relation to the amendments, but I want to know the Government’s thinking. Part of our confusion arises from the fact that we do not quite understand the Government’s intentions, given the various changes in taper relief and the desire to simplify the capital gains tax and related regime. What is their thinking in introducing the additional level of complication caused by working out the reliefs? Can the right hon. Lady explain in a couple of sentences why the Government are trying to drive forward such a complicated proposal?

Jane Kennedy: As I said in my opening comments, our intention was to consider the individual at the point at which the claim for relief was sought. The involvement of that individual was the focus of the work on the proposals. However, I acknowledge the criticism that the hon. Member for Runnymede and Weybridge made of the example in the explanatory note. I will seek to clarify the matter for consideration on Report. The purpose of the proposal was to make sure that entrepreneurs relief was targeted in the appropriate way as intended when we set out the reasoning behind it. I shall return on Report to the genuine concerns expressed by the hon. Gentleman today. I hope that he accepts my response in the spirit in which it is intended and acknowledges that it would not be helpful at this stage to press the amendment to a Division.

Philip Hammond: What I am hearing from the Minister is that, as a matter of principle, she wishes to exclude assets when rent is being received, but that she might be persuaded that the retrospection implied in the drafting of the Bill would be unfair and unreasonable, at least in some cases. I am grateful to her for taking that on board. I just hope that when we discuss the Bill on Report, other matters will not drown out consideration of such important details and that we shall have a proper opportunity to scrutinise the Government’s proposals.
Detailed points arising from other Bills are often dealt with extremely well by our colleagues in the other place. It hardly needs to be said that one of the great problems with Finance Bills is that we do not have the luxury of taking a high-level view and allowing detailed issues to be resolved up there, so we have to get it right on the first go, but in view of what the right hon. Lady said, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Nicholas Winterton: I have received representations relating to a stand part debate on schedule 3, and I am persuaded that a short stand part debate would be appropriate.

Question proposed, That this schedule be the Third schedule to the Bill.

Philip Hammond: As we have had several debates on schedule 3, I would not rise at this stage if it were not that some issues have arisen since amendments were tabled. I would like to run through those five—or perhaps six—points now, in the hope that the Minister will be able to comment on them.
There is an overall concern that entrepreneurs relief has been lifted from the old retirement relief. That system had become complex and, at the time it was abolished, had begun to throw up problems. It appears that some of those problems have been imported into the entrepreneurs relief. May I ask the Minister to consider whether the restriction on personal companies is appropriate in a world where the limited liability partnership is available as an alternative business structure, and is not subject to any such restrictions? Are the Government pushing entrepreneurs towards the limited liability partnership route? That would be the effect of the different treatment of partnerships and companies. People who expect to have equitable interests below 5 per cent. would be strongly advised to go down that route, where they would not be subject to a disqualification—which they would be in a company—for holding less than 5 per cent. That seems inequitable. Unless the Minister says that there is a deliberate strategy to encourage certain types of business to go down that route, it looks like a careless failure to update the dusted-off retirement relief to reflect that alternative business structure, which was not available when retirement relief was operating.
Then there is the whole or part of a business test for a disposal, which is distinct from taper relief, where all business assets were eligible. That test, which also applied in retirement relief, is difficult and problematic and is likely to lead to complex disputes and probably litigation.
The second issue is transitional relief. Why did the Government set their face against at least a transitional—perhaps five years—lifting of the many restrictions on reliefs? Instead, they forced a mad scramble for the exit door, with sub-optimal outcomes for both the economy and individuals, which left many aggrieved. Would be vendors who could not get it done in time for the abolition of taper relief are yet another group looking forward to the opportunity to give the Government a good kicking in a general election.
The third point relates to proposed new section 169I(6)(b) on page 120, line 42. The requirement to be an officer or an employee is iniquitous because it does not mirror the provisions in respect of limited liability partnerships. The Government should reconsider that. If they have a principled objection to investors who are not involved in the day-to-day running of the business benefiting from entrepreneurs relief, the provisions for the disposal of interests in limited liability partnerships are defective. The practical effect is that an investor taking a role in a limited liability partnership will be entitled to entrepreneurs relief on the disposal of his interest, while an investor in shares in a company, if he is not an officer or employee of that company, will not be entitled to entrepreneurs relief.

Mark Field: I am following with great interest what my hon. Friend says. Does he not think that the measure runs entirely counter to the Government’s intention in the Legal Services Act 2007? Limited partners, for example, have a number of outside investors coming into law firms who are seeking to develop their business overseas and have an outside investment. My hon. Friend’s point is not simply an academic issue—it is something that is likely to have practical relevance in very short order.

Philip Hammond: My hon. Friend is right, and he has much more knowledge than I in that field of legislation. A theme is developing. The Minister has not been particularly forthcoming in clarifying matters, but I am seeking to understand why on the one hand there is a clear Government policy decision to encourage one type of behaviour and discourage another, while on the other, what we actually have is vague drafting, a lack of clarity or the use of provisions from old, redundant legislation, which will give rise to unintended consequences. If we know that the Government intend a consequence and we do not like it, we can have a political debate, but I suspect that in many areas, it is not that the Government have deliberately set their face against an outcome, but have inadvertently created a trap into which some classes of entrepreneurs may accidentally fall.
The Opposition do not advocate nominal directorship, and I have said so already in the course of our proceedings. It would be bad legislation if we created an environment that drove people who are passive investors to become notional employees or officers of a company, simply for tax relief purposes. I would like confirmation that that is also the Government’s view. At present, there is no provision to allow the sale of an asset used in a business before the individual withdraws. We have discussed in relation to one of the amendments a circumstance in which the asset is sold after the individual has withdrawn from the business. What about the real-world scenario, where an asset is sold before the individual withdraws? For example, a farmer who is merrily farming his 100 acres is made an unrefusable offer by a developer who wants to buy four acres for an enormous sum of money. That is probably unlikely in present market substances, but let us imagine another day when the sun is shining. Having made the decision to sell that piece of his holding, the farmer decides that he can retire and wishes to sell the remainder of the farm. In those circumstances, he would not be entitled to relief on the initial sale of the land, which may be by far the more valuable asset with a bigger capital gain, but will be entitled to relief only on the subsequent sale of the remainder of the farm. Perhaps the Minister will confirm that that is the case, and whether she thinks that it is proper. I draw attention to proposed new section 169I(8)(b), because if that farm was operated by a partnership, the partners would be able to dispose of that land and obtain the benefit of entrepreneurs relief. Sole traders, however, are once again disadvantaged.
A point made by the Law Society—I am not an expert on trusts—is that many trustees carry on business. There are strong reasons why trustees, particularly those controlling trusts that comprise farmland, may wish to continue business. Under the Bill, trustees are eligible for entrepreneurs relief only if the asset is used by a beneficiary of the trust in the carrying-on of a business by the beneficiary. There are also very tough restrictions on the ability of trustees to obtain entrepreneurs relief on the disposal of shareholdings. Why is entrepreneurs relief not routinely available to trustees when carrying on a business in their own right?
Finally, the concept of a disposal being part of the withdrawal of an individual from participation in a business is far from clear. Those who make a living dealing with these matters think that there is scope for endless debate and that it is inevitable that there will be litigation on what constitutes a withdrawal. Would the Financial Secretary come up with a crisper definition of the term “withdrawal from business” that ordinary unadvised entrepreneurs can understand? We must bear in mind the fact that the maximum value of entrepreneurs relief is £80,000. We are not talking about large-scale corporate disposals with the involvement of lots of high-powered lawyers and accountants. In many cases we are dealing with entrepreneurs who will have the benefit of relatively straightforward advice from the local auditors and accountants whom they routinely use. With that, I have concluded the exhaustive list of points that needed to be made about schedule 3.

Jane Kennedy: I had hoped to have a very brief debate on schedule 3 stand part, if any. The hon. Gentleman has raised some new matters, but I do not accept that entrepreneurs relief is simply a rehash of retirement relief. It shares some of the same features, but it differs in a number of important respects. For example, there is a shorter and simpler qualifying period and there is no minimum age for qualification.
In earlier debates on the schedule, we discussed why there were no transitional provisions. A period of notice of the changes was given when the announcement was made at the pre-Budget report, although I accept that entrepreneurs relief was not announced until January. There has been a period of consultation, and people had time to act if they wished to do so. The hon. Member for Runnymede and Weybridge asked why there was an officer or employee requirement, and said that that would unfairly influence behaviour in an unwelcome way. I reiterate that relief is targeted at people who have a full stake in the business. Partners have that stake. External investors in companies do not participate in the same way, and so are subject to an extra employee or officer test. It is not our intention to encourage the creation of artificial partnerships. As I have said, I will monitor the progress of entrepreneurs relief. The hon. Gentleman asked whether passive investors will simply become officers of the company. The officer or employee test is a pragmatic way to check active participation in a business. As I have said, passive investors have other tax advantage options open to them, such as the enterprise investment scheme.
The hon. Gentleman asked why we should have personal company rules, and whether all new businesses will be set up as limited liability partnerships as a result. Businesses will continue to be set up in a variety of ways for a variety of commercial reasons. Tax, including the availability of entrepreneurs relief, will be just one factor that people can take into account in deciding on the business structure that is right for them. The differences between the capital gains tax rules for partnerships and companies reflect their different natures. As far as entrepreneurs relief in companies is concerned, the requirement to hold at least a 5 per cent. stake in the company strikes a fair balance.
The hon. Gentleman asked why there is a test on the disposal of all or part of the business. That is part of the targeting of relief on people who withdraw from a business. Entrepreneurs relief is not intended to replicate the taper relief. As I have said repeatedly, entrepreneurs relief is aimed at entrepreneurs. If relief is to be extended to trustees who hold shares in the same company, it is right that the individual beneficiary should have a direct stake in the company, as well as being directly involved in the business as an officer or employee of the company.
We have discussed the definition of “withdrawal from participation”. I do not think that it is difficult to define. I am sure that the hon. Gentleman is right about lawyers seeking to argue the case, but the provisions in the schedule complement the simplified capital gains tax regime with focused tax relief for entrepreneurs. Taken together, that major reform of the capital gains tax regime will deliver a system that is more sustainable and straightforward for taxpayers, while remaining internationally competitive. Having answered as many of the hon. Gentleman’s questions as I can, I hope that he will allow schedule 3 to go forward under a fair wind.

Philip Hammond: The genesis of entrepreneurs relief took place in the panic reaction to the tidal wave of anger that followed the announcements in the PBR. If Treasury Ministers have learnt one thing over the past seven or eight months, they should be trying to soothe people who are angry. The Minister has just told the Committee that people had a satisfactory period of notice, because they knew what the new rules were since the PBR last year. However, they did not know what the new rules were at all, because Downing street was briefing within 24 hours that there would be some kind of U-turn on the announcement in the pre-Budget report. No one knew where they stood until January. Even then, the level of trust in Government announcements was so eroded that people were still not confident that they understood the system. The right hon. Lady said that people had had the opportunity to act if they wanted to, but I can tell her that that statement will provoke anger among many people who have tried and failed to exit businesses before the cut-off date for taper relief, having had to wait until January to see what the final shape of the regime would be.
The Minister told us that the structure of the relief was designed to reflect the fact that shareholders enjoy full participation in a business, and that investors in a company do not. I am afraid that that just reinforces the prejudice among Conservative Members about the Government not understanding how smaller and medium businesses work. In practice, limited liability partnerships and limited companies are now alternative structures, which can be used in most cases for the same purposes in setting up a business. There is no difference in fact, and now a clear tax advantage is being given to the limited liability partnership, which in itself sends a signal.
I am disappointed with the Minister’s response in the stand part debate. She has said that she will return to schedule 3 on Report, and I am grateful that she will do so. We are happy to engage in any discussions between now and Report, so I shall not ask my hon. Friends to vote against schedule 3 at this stage of the Bill’s proceedings.

Question put and agreed to.

Schedule 3 agreed to.

Clause 8

Transfer of unused nil-rate band etc

Question proposed, That the clause stand part of the Bill.

David Gauke: Sir Nicholas, what a great pleasure it is to serve under your chairmanship—this is my first opportunity to speak during our proceedings. I am delighted to learn that the sun was shining over the fine county of Cheshire at the weekend—long may that continue. The sun was also shining over the fine county of Hertfordshire on Sunday.
I would like to take the opportunity to make a few remarks on the Government’s policy on inheritance tax and the provisions contained in clause 8, with the details set out in schedule 4. We have tabled a number of amendments about those details, which I will address when we reach that point.
The Conservative party welcomes attempts to address the issue of the increased burden of inheritance tax. In 1997-98, 3 per cent. of estates paid inheritance tax, but according to the most recent figures, that is now up to 6 per cent. Research for Scottish Widows showed that 37 per cent. of households are now worth more than the inheritance tax threshold. The average detached house price last September was £326,000—above the then threshold for inheritance tax of £300,000. The average house price may have changed since then. None the less, inheritance tax is a concern for a far wider group of people than was the case not so long ago. In my constituency, relatively modest properties in towns such as Rickmansworth, Berkhamsted and Tring—attractive towns, I would concede—are well above the inheritance tax threshold. There is great concern about inheritance tax and it would be churlish for us not to welcome the move of allowing the nil-rate band to be transferred between spouses and civil partners, as clause 8 and schedule 4 would permit.
Not everybody welcomes those provisions. In The Guardian of 12 October, Polly Toynbee was most critical. I am sure, Sir Nicholas, that like me you read Ms Toynbee’s articles with great interest. She stated:
“This was more than a horrible humiliation for the Prime Minister. This was the week that social democracy ebbed away in England.”
Indeed, she makes a clear distinction between what is occurring with the devolved Administrations in Scotland and Wales, and what is happening in England. She went on to describe inheritance tax as “a Labour talisman”.
In a recent pamphlet, the Fabian Society described the announcement of the Government’s policy on the issue as
“a profoundly depressing moment for those interested in fair taxation”.
We do not share that view. We think the fact that inheritance tax now applies to a much wider group of people is unfair. There is consensus that there is a role for it, but to apply it to relatively modest homes and estates seems wrong. When inheritance tax hits ordinary families in ordinary homes, it is right that it is reformed.
However, we do agree with some of the criticisms made by the likes of Polly Toynbee and the Fabian Society. The policy was a response to the Conservative party’s policy on the matter, and the announcement by my hon. Friend the Member for Tatton (Mr. Osborne) in Blackpool on 1 October, about raising the threshold for inheritance tax to £1,000,000. The Fabian Society paper describes the Prime Minister’s “panic-stricken failure” to stand his ground, and the pre-Budget report as a “panic-driven surrender”.
A letter to The Guardian on 15 April 2008 by various notable figures on the left of British politics, referred to 
“the Government’s retreat in the face of a rightwing challenge over inheritance tax”.
The letter was signed by 14 Labour MPs, including one Parliamentary Private Secretary. I know that Parliamentary Private Secretaries are not necessarily all expected to support Treasury policy these days, but it is striking that there was such distrust and opposition from Labour figures to the policy. I note, however, that none of the signatories to the letter is serving on the Committee—members have clearly been selected with some care.
I refer again to Polly Toynbee’s article of 12 October when she wrote about the Prime Minister. It is an important point because it gets to the motivation of the policy under clause 8 and schedule 4. She wrote:
“But when Cameron threw ‘phoney’ at him in Prime Minister's Questions, it stuck like napalm. He could duck the bottles thrown over his election funk, but ‘phoney’ will stick because his comprehensive spending review smacked of panicky, comprehensive cowardice.”
The criticism was that the move was tactical, and it was reiterated this weekend by the right hon. Member for North Tyneside (Mr. Byers) in an article in The Sunday Times, in which he stated:
“In the past year far too many decisions about tax have been taken to try to secure a tactical advantage. This has led to some damaging mistakes. Whether in relation to the changes to inheritance tax, capital gains tax, the treatment of nondoms or the abolition of the 10p income tax band, the whole approach has been about political positioning.”
Many hon. Members, in the House and in Committee, might have that concern about the policy and think that it is an act of political calculation in response to a policy announcement at the Conservative party conference that was undoubtedly extremely popular.

Jeremy Browne: Does the hon. Gentleman still regard the Conservative policy of raising the inheritance tax threshold to £1 million as wise, rather than giving greater assistance to those who are losing out as a result of doubling the 10p rate?

David Gauke: Of course, we are not discussing an either/or case. The inheritance tax policy was wise, as was the raising of the threshold. The policy responded to the legitimate concerns of a large number of people. It was to be fully funded by introducing a levy on non-domicile people within the United Kingdom. I do not regard the matter as an either/or approach. As for the 10p rate, we will all hear a statement about it later today, and we have called on the Government to reopen the Budget. We shall learn this afternoon precisely what they propose to do.

Philip Hammond: We might.

David Gauke: We might. It will take some days before we learn the full details and, on the basis of recent experience, we should not rush to make a judgment.

Nicholas Winterton: Order. I advise the hon. Gentleman that, hopefully, we are debating the transfer of the unused nil-rate band in respect of inheritance tax. I have allowed him pretty wide discretion in dealing with inheritance tax, but the clause is fairly narrowly drawn and relates to the transfer of the unused nil-rate band.

David Gauke: I am grateful to you, Sir Nicholas. I shall return to that precise point.
One of the issues that has been disputed is when the Government decided to introduce a transferable nil-rate band. There was an exchange on 6 November 2007 in the House of Commons when the Leader of the Opposition raised that very question with the Prime Minister, and said:
“look me in the eye and tell me that you were planning to reform inheritance tax before our party conference. Can the Prime Minister look across the Dispatch Box and just say it?”
The Prime Minister gave a clear response:
“The answer is yes—unequivocally yes...All the records will show it, under whatever rule they are released under the Freedom of Information Act.—[Official Report, 6 November 2007; Vol. 467, c. 33.]
There was a press release on 8 November, two days later. It was certainly presented in such a way that it seemed the Government had made the decision to allow a transferable nil-rate band before the Conservative party conference in October 2007. In examining when the Government made that policy decision, it is worth looking at the Treasury press release of 8 November. It states:
“We have records of officials considering the proposal on January 9 2007.”
That is very clear. There was consideration on 9 January, no doubt in the run-up to the Budget of 21 March 2007. It is notable that, although that Budget set out thresholds for 2010-11 for inheritance tax, there was nothing on the transferable nil-rate band. Indeed, the press notice that was issued alongside that Budget states that the reason behind detailing the threshold for 2010-11 was:
“To continue to provide a fair and targeted system, with certainty for families”.
Given that that was the position in March 2007, it would appear that there was no intention at that point to pursue this proposal, although it had been looked at.
On 27 July 2007, the new Chancellor received the paper detailing proposals on the transferable nil-rate band. To be fair to him, on 20 August 2007 he confirmed that the proposal was under discussion. I do not know what is significant about 20 August 2007, other than that it was the day after the publication of an article by my hon. Friend the Member for Tatton criticising inheritance tax and dropping what could be described as a fairly broad hint that a Conservative Government would look at that matter and that there may be proposals on the way. We are aware that the Chancellor was looking at these proposals at that point.
On 3 September 2007, the Chancellor received further advice on the proposals and on 5 September he asked officials to work up final proposals. I hope that I am giving a fair account of what happened. Then, we learn, subsequent detailed costings followed before the pre-Budget report set out all details on inheritance tax reform on 9 October 2007.
It was rather frustrating. The Treasury letter was quite detailed on how the policy was developing, but it is rather like a detective thriller with the last chapter ripped out. On 5 September the Chancellor asked officials to work up final proposals. Then we heard little more than that there were various costings. I will come back to the point about detailed costings. We did not receive the detail. We did not learn unequivocally—to use the Prime Minister’s word—that the Treasury had decided to implement the policy before 1 October.

Mark Todd: If this lengthy discourse is intended to demonstrate that tax policy is at least partly informed by political decision making, I am not sure that that is a tremendously profound argument.

David Gauke: I am grateful to the hon. Gentleman because he makes a reasonable point. Of course this was a policy that was more than influenced by the proposals made by my hon. Friend the Member for Tatton on 1 October. Our case is that that was the clinching aspect in the Government adopting this approach. It is significant that the hon. Member for South Derbyshire, who is an extremely reasonable man, concedes that point, but the Prime Minister does not.

Jeremy Browne: The hon. Gentleman seems to be making a persuasive case that there is no need to elect a Conservative Government because his party is such an effective think-tank that the current Government are pleased to take on its policies in their entirety.

David Gauke: It would be fair to say that the intellectual weather is being created by the Conservative party. Unfortunately, the Government are not as strong at implementing Conservative policies as a Conservative Government would be. I will come back to that point in a moment.
It is worth exploring how the policy formulation worked in this case. To be fair to the Government, there was a reason why further details were not provided. According to the Treasury letter, information was identified as falling into the exemption to disclosure set out in section 35(1) of the Freedom of Information Act, which relates to the formulation or development of Government policy when it is not in the public interest to disclose that information. Imagine the frustration that Ministers must have felt if vital evidence proving that the decision was made before 1 October was there, but officials declared that it was not in the public interest to release the documents and validate the Prime Minister’s words, particularly given the widespread scepticism of the media about the Government’s claims that the decision was entirely unrelated to the Blackpool announcement.

The Times on 11 October, referring to the original drafts of the pre-Budget report, stated:
“it is understood that inheritance tax did not feature... But when Gordon Brown received polling data for marginal constituencies on Saturday afternoon everything changed. The Prime Minister shelved plans for an election and a decision was made to change the direction of the Pre-Budget Report. With no election, Labour could neuter the Opposition by pinching the very policies that had given the Tories a poll bounce in marginal seats... The Chancellor and officials spent long hours on Sunday rewriting the speech. This process continued through much of Monday. Out went stamp duty and other tax cuts: in came inheritance tax.”
There were television reports on that particular Sunday. Jon Craig of Sky reported that a number of Treasury civil servants arrived at No. 11 at 6 pm
“in what looked like their gardening clothes or embarrassing leisure wear”.
I think that that was unnecessarily critical of Treasury officials. I am sure that they look splendid at the weekend. He surmised that they had been summoned at very short notice.

Nicholas Winterton: Order. I am a very kind and caring Chairman. The hon. Gentleman is making a fascinating and entertaining speech, but it is not entirely relevant to the clause before us. Can I give him some advice? He is going a little bit too wide. If he could come back to the clause itself, the whole Committee would be very grateful.

David Gauke: I am grateful for your advice, Sir Nicholas. I will stay off the leisure wear or otherwise of Treasury officials, but I should like to make one brief point on the freedom of information request on the formulation on this policy. Section 35(1) of the Freedom of Information Act 2000 was the reason why further details as to when the policy decision was taken were not revealed, yet section 35(2) states:
“Once a decision as to government policy has been taken, any statistical information used to provide an informed background to the taking of the decision is not to be regarded... as relating to the formulation or development of government policy”.
Why is that significant? It is significant because we were told that a number of costings were prepared by Treasury officials. If any decision was made to implement the policy before 1 October, any costings subsequently produced could have been released under section 35(2). The Committee may draw its own conclusion from the fact that they were not.
I should like to make a number of observations, raise some concerns about these specific provisions and explore at greater length the issues contained in the amendments concerning the various groups that do not benefit from the nil-rate band. It is worth observing that the transferable nil-rate band relates only to married couples and civil partners, so the divorced and unmarried will not be able to benefit from those provisions. In other contexts, the Prime Minister has effectively said that recognising marriage within the tax system discriminates against children of single or unmarried parents, so I would be grateful to know whether the Financial Secretary believes that the tax system should recognise marriage in the way it does within the provision on the transferable nil-rate band and whether that principle could and should be recognised more widely.
Of course, another group of people who are excluded by those provisions are siblings, and there have been recent cases in the European Court of Justice and the European Court of Human Rights in which siblings have addressed that issue with regard to inheritance tax. Will the Minister shed further light on the Government’s position on that and on whether there is an argument for recognising the position of siblings in those circumstances? There is also the point about whether that helps all spouses, which we will explore in a moment. The amendment that relates to estate duty is particularly important, and we will come back to that.
A number of married couples and civil partners are already able to benefit from the existence of nil-rate band trusts. If a couple have been properly advised, they could already benefit from a transferable nil-rate band. I do not know whether the Financial Secretary has any information on the extent to which nil-rate band trusts are already used, but she probably needs that information to assess the cost of that policy. If transferable nil-rate band trusts are in widespread use, the cost of the policy will be somewhat reduced, but the number of people benefiting from the change would perhaps not be as great as has been presented. I will be grateful if she looks at that point.
There is also the issue of the administration of the policy. In many circumstances the transferable nil-rate band could be used in cases where a spouse has died some years ago, but in those circumstances it might be difficult for the surviving spouse or their heirs to locate all the necessary documentation. That point was raised on the “Money Box” programme on 3 May—I am not sure whether the Minister heard it. It highlighted that the relevant form for benefiting from the nil-rate band states that it must be accompanied with the death certificate, the marriage certificate, the will, documents relating to the grant of representation and any deed of variation. Of course, the marriage and death certificates might be available from the Public Record Office, as the Financial Secretary, to be fair to her, will probably point out. The will and grant of representation will be held by the courts in some cases, but not in all. That raises the question of how the new policy will be enforced: will it be a light-touch regime, or will Her Majesty’s Revenue and Customs rigorously enforce the requirement to produce all of those documents?
A related and ongoing point is that the better the record keeping, the more easily the policy can be implemented. Will there be any attempt to try to publicise the requirement to retain records? Having introduced the policy, we do not want to find individuals running into difficulties because they cannot locate all the documents that they need to use the new rate band. There could be a considerable number of years between the death of the first and the second spouse; I am sure that the Minister will agree that that is a legitimate concern. Guidance as to how HMRC wishes to deal with that matter will benefit the Committee.
In conclusion, we will raise our concerns and scrutinise the policy, but we recognise that it is an attempt, for whatever reason, to deal with inheritance tax and the fact that far more people are hit by it now than was once the case. In that sense, we welcome it, but we question why the Government have introduced it. As the hon. Member for South Derbyshire pointed out, political considerations may have played more than a small part in that—not his phrase but, I think, the implication of what he was saying. If we have succeeded in taking the Government in a particular direction, we are certainly pleased about that. We have various questions about how the policy will be administrated and will be grateful if the Financial Secretary can address those matters.

Colin Breed: I will not detain the Committee for very long, because this is a fairly simple and short clause. We all know that inheritance tax is a tax on transfers of value on death and also on certain lifetime transfers. It was introduced way back in 1984. In a previous life I was involved in it, and to think that it was 24 years ago seems amazing. When someone dies, their estate is chargeable to inheritance tax. The clause and the provisions in schedule 4 insert new section 8A into the Inheritance Tax Act 1984 to allow a surviving spouse or civil partner to benefit from the unused part of the IHT nil band of their partner.
At present, the first £300,000 is chargeable at a nil rate and the excess value is taxed at 40 per cent. The amendments mean that in future the remaining partner could pass on £600,000 free of inheritance tax on their death. On that basis, we support widening the exemption so that families can increase the chance of exempting the family home or their estate from IHT. However, there are a couple of aspects that we would like some clarification on. We seek the Minister’s reassurance on issues brought to our attention by the Association of British Insurers.
Under new section 8A(5), is the amount of nil-rate band that can be claimed on the death of the surviving partner limited to one marriage? What repercussions will that have for the taxpayer? Does the amendment to the penalty provision applicable when someone provides incorrect information make the person making the claim liable for any error, even if it was the deceased who gave that misinformation or lied on the original claim? Those are interesting and technical points, which I am sure the Minister will be able to give some reassurance on.
Another point, which has been touched on by the hon. Member for South-West Hertfordshire, is in respect of those people who may have already paid some of the old estate duty because a spouse died a very long time ago, and are now liable for inheritance tax because they will not be able to claim the nil band. I think that one of the amendments to the schedule addresses that issue. It is an issue for a relatively small number of people, but I think that it will be unfair, even with those few people, if we do not address that. I will leave my remarks about that aside, but, overall, we are supportive of the clause and hope that we can address those other aspects in the discussions on the schedule.

Mark Field: I confess that I support anything that mitigates the effects of inheritance tax. Therefore, although elements of the proposal are slightly unsatisfactory—I agree with a number of the comments made by my hon. Friend the Member for South-West Hertfordshire—it is a step in the right direction. I appreciate that now is not the time for a long discourse on inheritance tax—I see you nod sagely, Sir Nicholas—but one of the biggest problems about inheritance tax is that some of the wealthiest do not have to pay it, because they are able to order their affairs over many years with lifetime trusts.
One of the biggest concerns, as my hon. Friend said, is that so many people now find themselves subject to inheritance tax as a result of rising house prices. Part of the difficulty with that is that there is no opportunity for such individuals to mitigate the effect during their lifetime. Their main home is obviously the place in which they have to live. Such people regard themselves as being asset-rich but cash-poor, and they are not in any position to mitigate that. Although at one level it might warm the Minister’s heart to know that 6 per cent. of estates pay inheritance tax, dare I say that it is often the wrong 6 per cent. that pay?
One can argue—I could understand such an argument, although I might not entirely agree with it—that if we are to respect the idea of a life well lived, very wealthy people should be able to pass on certain things at their death. The worry is that the tax affects more than just middle England in our constituencies, Sir Nicholas. I note that there is great sun here in London, along with that in Cheshire and Hertfordshire. It is a coincidence that Hertfordshire, and, technically I should say Chester and west Cheshire, are two of the only counties in which I have lived outside London.

Emily Thornberry: Get on with it.

Mark Field: I lived in Islington, North as well for a while. Thankfully those political memories are well in the past, which is just as well, as I would not have wished to infringe either on the hon. Lady or on her next door neighbour in Islington, North.
My hon. Friend the Member for North-East Hertfordshire has raised some legitimate concerns. First, there is the sense of injustice felt by siblings living together, or unmarried couples whose relationship is of long standing, who will not qualify for any benefit under the nil-rate band. I hope that the Government will give some thought to that problem, not necessarily within the context of this year’s Finance Bill, but perhaps in the years ahead to ensure a just settlement.
I am particularly concerned about paperwork, particularly where the two relevant deaths are many years apart. I speak from my own experience as executor to my late father’s will some 17 years ago—I have no idea where those papers are now. We would like some reassurance that there will be a soft-touch approach by HMRC to such cases because, I hasten to add, if someone like myself has not got hold of those papers, I suspect that many others will have found that various papers have been mislaid, perhaps during two, three or four different moves. I hope to get some reassurance that no great rigour will be expected in that regard, and that the evidence will be straightforward and easy to obtain from any beneficiary.
I hope that we can initiate a strong debate, not only on the clause, but when we come to the meat of the matter in schedule 4, in respect of which my hon. Friends have made a number of recommendations and proposals. I hope also that the Minister will have some robust words of reassurance with regard to the important elements mentioned by my hon. Friend the Member for South-West Hertfordshire and the hon. Member for South-East Cornwall.

Jane Kennedy: As the hon. Member for South-West Hertfordshire has said, clause 8 introduces schedule 4. There is a tax-free allowance or a nil-rate band levied on the estates of the deceased that takes the first part of every estate out of charge. Any excess is charged at a marginal rate of 40 per cent. As previously announced, the threshold of the individual nil-rate band for the current financial year is set at £312,000. It is set to increase in future years—to £325,000 in 2009-10 and to £350,000 in 2010-11. In addition, the inheritance tax legislation includes an exemption for transfers of assets to a spouse or civil partner. Many people use this spouse exemption to leave everything they own to their surviving spouse or civil partner without triggering an inheritance tax charge.
The changes announced in the pre-Budget report build on the long-standing spouse exemption. Under the new rules, if any nil-rate band remains unused on the death of the first spouse or civil partner, it may be carried forward for use on the second death instead. That means that if none of the nil-rate band is used up on the first death, the nil-rate band for the second death will be doubled. In 2008-09 it may be possible to exempt up to the first £624,000 of a widow or widower’s estate from inheritance tax, and, on the basis of the planned increase in the nil-rate band, that amount will rise to £700,000 by 2010. That ensures that the heirs of all married couples and civil partners will be able to benefit from both partners’ individual nil-rate bands, without the couple needing to have undertaken complex legal and financial planning. The change will reduce the number of tax-paying estates. For 2008-09 the Government estimate that only about 4 per cent. of deaths will give rise to an inheritance tax liability.
The hon. Member for South-West Hertfordshire asked a number of questions. I will try to deal with each in turn, particularly the pertinent questions—I will not be drawn down any of the other lines of debate, Sir Nicholas. The inheritance tax powers relief reflects the formal rights and responsibilities that marriage and civil partnership relationships necessarily entail. The hon. Gentleman asked about siblings: he will be aware of the European Court of Human Rights judgment in the case of Burden v. United Kingdom. We welcomed that judgment, which recognised that cohabiting couples are not in a comparable position to a married couple or civil partnership for the purposes of inheritance tax.
The hon. Gentleman also asked about documentation, as did the hon. Member for Cities of London and Westminster. This is a valuable relief, so it is right that individuals have to provide relevant documents to support their claim. We are aware, however, that where the first death occurred before the 2007 PBR announcement, the estate may not have retained all of the relevant documents. That is why in such cases HMRC guidance requires in support of a claim only copies of documents that can be obtained from public sources. I assure the hon. Member for South-West Hertfordshire that HMRC has already published guidance on its website about the documents that should be kept and that information is also included in the pack that people receive when they are dealing with the estate of a deceased spouse or civil partner.
The measure reduces the number of tax-paying estates by about 40 per cent., to only 4 per cent. of estates. Those are the facts, irrespective of what other commentators may claim. The number of tax-paying estates in 2008-9 is estimated to be about 23,000. More broadly, the measure provides the certainty and reassurance of a double allowance for 12 million married couples or civil partnerships.
The change ensures that heirs of all married couples and civil partners will benefit, without the couple needing to have undertaken complex legal and financial planning, as I have said. The costs were scored as normal in the PBR and Budget reports and, for the Committee’s information, they are costed at £1 billion in 2008-9, £1.2 billion in 2009-10 and £1.3 billion in 2010-11.
The hon. Member for South-East Cornwall asked about occasions when there had been more than one marriage or civil partnership. The transfer is limited to one extra nil-rate band for a good reason: it is a pragmatic step to prevent any one individual accumulating a large allowance. We consider that one extra nil-rate band is sufficiently generous. It hardly needs saying that that is sensible, but it was worth it for the humour.

Colin Breed: I thought that may be the case. It is a matter of balancing the benefits of a large number of allowances against the disbenefits of a large number of wives.

Jane Kennedy: We will simply nod at that. The hon. Gentleman also questioned the penalty provisions. We will return to those in the debate on amendment No. 64, when I will give further details.
The clause will provide welcome simplification and reassurance for millions of married couples and civil partners. The hon. Member for Cities of London and Westminster talked about those who are asset-rich and cash-poor and who believe that their ability to demonstrate a life well lived in having a benefit to pass on to their families was being undermined. He described the effect of the rise in house prices.
Well over a year before this measure was announced in the pre-Budget report, I met a constituent in Liverpool, Wavertree who had worked as a joiner for Liverpool city council for the whole of his working life—more than 40 years. Early in his life he had married and he and his wife bought the house that they lived in for the whole of that period. They bought the most expensive home that they could afford. It was a large, comfortable family home. It was not a huge dwelling and by London terms was perhaps relatively modest; none the less, they kept that home and cherished it throughout their married life.
When the man came to me he was angry and distressed because he believed that the value of the property had risen to the point where his family would not benefit from the relief from inheritance tax. It had done precisely what he hoped it would do when he bought it: it was the only thing of value that he had to pass on to his family. I felt a huge amount of sympathy for the case that he made. For that reason, I believe that the measure that we are making is a good one. I believe that it will be the cause of enormous relief to many families across the country who have seen the value of their homes increase in the way that I have just described and for whom it is the only benefit that they can leave to their families.
I am sure that having heard the debate, notwithstanding the questions that have been raised, the Committee will agree to see clause 8 stand part of the Bill.

David Gauke: I am grateful for the right hon. Lady’s remarks. The example that she gave of the joiner who had worked all his life demonstrates why there are concerns about inheritance tax. She expressed that very clearly and I am glad that she takes a similar view to my party, as opposed to that of Ms Toynbee and the Fabian Society. I will not dwell on that point.
I am grateful for the right hon. Lady’s remarks on administration, paperwork and documentation. I hope that in the implementation of this policy HMRC will pursue the approach that she has outlined of not requiring documentation that will not be easily available from public records. She touched briefly on the question of recognition of marriage within the taxation system. The Conservative party supports that principle. There are other taxes where a stronger case could be made for such recognised, but I think that it should be recognised. We note that, in principle, the Government support that view in the context of inheritance tax, if not elsewhere.
I apologise if I missed the point about the number of nil-rate band trusts in existence. I am not sure whether the Government have it, but the number is relevant when working out the actual cost of the policy to the Exchequer. When making the announcement, the Government did not particularly acknowledge the number of families that would benefit from the arrangements in the immediate aftermath of the pre-Budget report. I did not spend a great deal of time on the matter earlier, but in a period of rising house prices—although, admittedly that is not the case at present—it may still be worth while for married couples to have a nil-rate band trust, and they are likely to continue to do so. However, the significance of the policy to the Exchequer and to a number of people will depend on whether they already have such a trust in place.
The Financial Secretary would not be drawn on when the decision was made to introduce a transferable nil-rate band. She is being very wise, which is more than could be said of the Prime Minister on 6 November 2007, when he unequivocally stated that the Government had been planning to take such action before 1 October. The Committee will be pleased to know that I shall not expand on that point. We shall not oppose clause 8 because it is a step towards dealing with a serious concern that affects many people. It is not as big a step as we would want, but we welcome the Government’s proposals.

Question put and agreed to.

Clause 8 ordered to stand part of the Bill.

Schedule 4

Inheritance tax: transfer of nil-rate band etc

David Gauke: I beg to move amendment No. 62, in schedule 4, page 131, line 39, leave out from beginning to end of line 7 on page 132 and insert—
‘(3) Where a claim is made under this section, the nil-rate band maximum at the relevant time is to be treated for the relevant purposes as increased by the relevant percentage specified in subsection (4) below (but subject to subsection (5) and section 8C below).
(3A) For the purposes of subsection (3) above—
(a) where the claim specifies that it is made in relation to the death of the survivor (“a death claim”)—
(i) “the relevant time” is the time of the survivor’s death, and
(ii) “the relevant purposes” are the purposes of the change to tax or additional tax on or by reason of the death of the survivor;
and
(b) where the claim specifies that it is made in relation to an immediately chargeable lifetime transfer (meaning a chargeable transfer which is not made on death and which was not a potential exempt transfer) (“a lifetime claim”)—
(i) “the relevant time” is the date on which that chargeable transfer was made, and
(ii) “the relevant purposes” are the purposes of the charge to tax on that chargeable transfer (not being additional tax payable by reason of the death of the survivor).
(4) For the purposes of subsection (3) above, but subject to subsection (4A) below, “the relevant percentage” is—
where—
E is the amount by which M is greater than VT in the case of the deceased person; and
NRBM is the nil-rate band maximum at the relevant time.
(4A) Where a claim has been made under this section in relation to an immediately chargeable lifetime transfer (“the spent transfer”) and the survivor’s death did not occur within 7 years after the date on which that chargeable transfer was made (“the spent transfer date”), then for the purpose of all claims under this section in relation to occasions (whether immediately chargeable lifetime transfers or the death of the survivor) on or after the seventh anniversary of the spent transfer date the adjustment specified in subsection (4B) below shall be made for the purpose of calculating the relevant percentage under subsection (4) above.
(4B) Subject to subsection (4C) below, E for the purpose of the formula in subsection (4) above shall be reduced by R per cent of itself where—
PNRB is the amount which would have been survivor’s nil-rate band maximum at the time of the spent transfer if no claim had been made under this section in relation to the spent transfer;
TNRB is the survivor’s nil-rate band maximum as computed in the light of the claim made under this section in relation to the spent transfer; and
ELT is the amount by which the value transferred by the spent transfer, added to the value transferred by any chargeable transfers made by the survivor within 7 years before the spent transfer, exceeded PNRB.
(4C) Where an adjustment was made under subsection (4A) above in calculating the relevant percentage in relation to the spent transfer, the adjustment specified in subsection (4B) above shall be made in relation to the amount to which E was adjusted on that occasion; and this subsection shall apply cumulatively where lifetime claims have been made in relation to successive spent transfers each of which has given rise to an adjustment under subsection (4B) above.’.

Nicholas Winterton: With this it will be convenient to discuss the following amendments: No. 61, in schedule 4, page 131, line 41, leave out ‘on’ and insert
‘or additional tax on or by reason of’.
No. 63, in schedule 4, page 132, line 28, leave out from beginning to ‘(if’ in line 30 and insert—
‘(a) in the case of a lifetime claim,
(i) by the survivor within the period of two years from the end of the month in which a lifetime transfer was made, or such longer period as an officer of Revenue and Customs may in the particular case allow, or
(ii) (if no such claim is made and the survivor dies before the end of that period) by the personal representatives of the survivor within the permitted period;
and;
(b) in the case of a death claim,
(i) by the personal representatives of the survivor within the survivor within the permitted period, or
(ii) ’.

David Gauke: I shall start with amendment No. 61. Traditionally, and in the majority of cases, an inheritance tax charge is triggered by the death of an individual. At that point, there will be a charge on the estate under section 4 of the Inheritance Tax Act 1984. However, there are other circumstances in which a charge may be triggered, such as in the event of a lifetime transfer—a potentially exempt transfer that turns out not to be exempt because it happens within seven years of the death. Let us consider circumstances in which person A makes a gift in, say, 2005, dies two years later and can no longer benefit from the provisions of potentially exempt transfers. In assessing the tax payable, it is necessary to look back at those gifts.
I should be grateful if the Minister confirmed my understanding of the arrangements. Is it the intention that the transferable nil-rate band will be available for both the estate on death and for any lifetime gifts? The Law Society has expressed concern that the drafting of the proposals is not as clear as it could be. I draw attention, in particular, to the provision that states:
“for the purposes of the charge to tax on the death of the survivor”.
It is possible to construe that as relating simply to the charge triggered by death in relation to the estate, not the lifetime transfer. I have acknowledged that such interest has been shown by the Law Society, and its proposed clarification when referring to the purposes of the charge to tax on the death of the survivor is to state
“or additional tax on or by reason of”
the death of the survivor, thus unambiguously incorporating the lifetime transfer. It would be unfair if the transferable nil-rate band should not extend to a gift made by the surviving spouse in his or her lifetime, and I do not believe that the Government intend that it should not.

Stephen Hesford: The hon. Gentleman posed the example of a person who makes a gift in 2005, whose death two years later ensures that it does not qualify for the saving provisions. Is it not the case that all that has happened there is that the saving provisions have not applied and that therefore there is a death and an associated inheritance tax situation to deal with? There are not two situations, there is just one: the individual does not benefit from the rules that they tried to benefit from because they died too soon.

David Gauke: I am grateful to the hon. Gentleman—I think. He may help me to explain my point. In the case of a gift that does not benefit from the transferable nil-rate band, it is possible, although I do not want to press this interpretation too hard, that the benefit gained from the transferable nil-rate band would only apply with regard to the estate on death, and not with regard to a lifetime gift. I do not think that that is the Government’s intention.

Stephen Hesford: It will all just come back into the pot.

David Gauke: No, I do not think that it does. If there is an ambiguity, it is that the element of the estate that was given away in the lifetime of the surviving spouse may be liable for inheritance tax, where as if the nil-rate band of the deceased spouse had been included, that would not be the case. That is the concern that I am raising.
A slightly more complex but related arrangement exists with regard to amendments Nos. 62 and 63. Those of us who served on the 2006 Finance Bill will recall lengthy debates and considerable controversy regarding the Government’s proposals on trusts and their concern that trusts were being used as an avoidance mechanism for inheritance tax. As a consequence of the Finance Act 2006, establishing a trust in certain circumstances may trigger an immediate liability for inheritance tax, which is a slightly different arrangement from that for an ordinary lifetime gift. The concern raised by the Law Society, which I do not think is a matter of ambiguity or clarification as the schedule does not currently address it, is that in creating a trust for one of her children, for example, the surviving spouse would immediately face a liability for inheritance tax and would not be able to make use of the transferable nil-rate band against the lifetime chargeable transfer made by the survivor.
Amendment No. 62 is a lengthy one and I am sure that the Financial Secretary and you, Sir Nicholas, will be pleased to know that I do not intend to go through it line by line. I have described the essential purpose of amendments Nos. 62 and 63 because the concern appears to be legitimate. I would be grateful for clarification from the Financial Secretary on those amendments.

Jane Kennedy: I confess that I do not have a great deal of sympathy with the amendments. Where lifetime transfers occur within seven years of someone’s death, they are counted as part of the death estate for inheritance tax purposes. Amendment No. 61 seeks to clarify that any transferred nil-rate band can be set against the whole estate, including those transfers made within seven years of death, and not only the part left behind at the point someone dies. I would like to reassure the Committee that amendment No. 61 is unnecessary. As drafted, the Bill refers to the transferred nil-rate band applying to
“the charge to tax on the death of the survivor”
and that is already sufficient to encompass lifetime transfers on which an inheritance tax charge subsequently crystallises on death.
Amendments Nos. 62 and 63 relate to the situations in which transfers of assets during someone’s lifetime give rise to an immediate inheritance tax charge. The Bill allows unused nil-rate band from a first death to be transferred for use by the estate of the surviving spouse on their death—the hon. Gentleman used the example of a widow seeking to make provision for her children. The amendments would allow unused nil-rate band from a deceased spouse to be transferred to the survivor during their lifetime, in order to reduce the immediate inheritance tax charge triggered if assets exceeding the current nil-rate band were transferred into trust. We do not believe that that change is either necessary or appropriate.
In developing this measure, we have focused on providing a simple mechanism for ordinary married couples and civil partners to be sure that their heirs will benefit from both partners’ individual inheritance tax nil-rate bands. The Bill seeks to obviate the need for the planning that would otherwise be required to exploit fully the nil-rate band of the first partner to die. Allowing any unused nil-rate band to be transferred when the surviving spouse dies achieves that intent. We do not believe that it is right to extend the measure to reduce lifetime inheritance tax charges. The inheritance tax charges on transfers into trust are designed to ensure that assets held in trust bear a fair share of inheritance tax.
We wish to reassure ordinary families that if a married couple own property in excess of the nil-rate band, they can be sure that both of their individual nil-rate bands will ultimately be taken into account, without the need for complex legal and financial planning. However, we are not minded to go further and provide relief to those who can afford to transfer more than £300,000 into trust while they are still alive. I fully accept that there are many reasons why someone might want to transfer assets into trust, but I believe that the current rules provide a generous enough exemption for such transfers, and that the changes the amendments seek are unnecessary.
The amendments also appear to contain some technical deficiencies—I appreciate that the Law Society may have been behind them, but we do not think that they work as they are perhaps intended to. In particular, they do not make the consequential changes to the commencement provision required for the transfer of unused nil-rate band to be effective before the surviving spouse dies. I therefore hope that the hon. Gentleman will not press his amendment to a Division. If he does, I shall invite my hon. Friends to resist it.

David Gauke: With regard to amendment No. 61, if the Financial Secretary is saying that it is the Government’s intention that lifetime gifts, should they not be potentially exempt transfers, will benefit from the proposal, then we welcome that clarification. The drafting produced by the Law Society is clearer than in the Bill, but if we have clarification that should be sufficient.
I note the Financial Secretary’s comments on amendments Nos. 62 and 63, but there is more to be said for them than she gives credit for. There is quite an argument—I put it no stronger than that—for permitting the nil-rate band to be used in such circumstances, although I accept that these proposals do not deal with the priority cases. They do not deal with the joiner to whom she referred, for example. There is an argument for consistency in this matter. We raised a number of concerns in 2006 about the proposals on creating an immediate liability to inheritance tax on trusts. It is not my intention to press this matter to a vote and I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

David Gauke: I beg to move amendment No. 44, in schedule 4, page 132, line 25, at end insert—
‘(8) For the purposes of the operation of this section, section 18(2) shall be ignored.’.

Nicholas Winterton: With this it will be convenient to discuss the following amendments: No. 45, in schedule 4, page 133, line 44, at end insert—
‘2A (1) Section 18 (transfers between spouses) is amended as follows.
(2) After subsection (4) insert—
“(5) Subsection (2) shall cease to have effect from 6 April 2008.”’.
No. 46, in schedule 4, page 136, line 36, at end insert—
‘(6) Where the deceased person died before 13 March 1975, section 8A applies as if any property then left to the survivor was not charged to estate duty, whether or not it was.’.

David Gauke: Amendments Nos. 44 and 45 address the issue of transfers to spouses who are non-domiciled in the UK. There is a long-standing limit on the transferable nil-rate band for non-domiciled spouses of just £55,000. That has stood since 1994 and has not been reformed. The Bill will reform the law relating to residents and domiciles. There is an argument for looking at the issue in the context of that reform and of the reform making the nil-rate band transferable.
The position of spouses who are non-domiciled is not as strong as that of domiciled spouses. I wish to probe the Government’s approach on the matter. Is the Financial Secretary convinced that the discrimination—I use that word in a neutral way—between domiciled and non-domiciled spouses is consistent with European law? For example, it would appear that a UK person is treated in a different way from people who are domiciled in other member states. The schedule may be an opportunity to look at the matter again. Amendment No. 44 would allow a non-domiciled spouse a full nil-rate band transfer. Alternatively, amendment No. 45 would abolish the non-domicile limit. I would be grateful to know the Government’s reason for the continuation of the £55,000 limit and whether they will review it.
Amendment No. 46 is the most significant of all the amendments that we have tabled on schedule 4. The issue was touched upon by the hon. Member for South-East Cornwall. It is about looking back to when the first death occurred some years ago. It is to be welcomed that, as part of the package, the Government’s approach looks back. The measure is not just about the death of the first spouse after 9 October 2007. It also looks back.
There is a distinction between inheritance tax and capital transfer tax on the one hand and estate duty on the other. Under inheritance tax and capital transfer tax, there was a full spousal exemption so that, when the first spouse dies and leaves his or her estate to his or her spouse, the nil-rate band has not been used at all, because it is entirely exempt from the IHT or capital transfer tax regimes.
With regard to estate duty, the situation is somewhat different, and transitional provisions were made between 1972 and 1975, which complicates matters. Essentially, estate duty was charged on the first death, but the property affected could be left out of the charge on the second death, which is the other way round from the current arrangements. Consequently, on the survivor’s death, the property could be left out of the estate for IHT purposes under the surviving spouse exemption, although that is now of little value, as I understand it, because it has not been indexed. When the deceased spouse leaves his estate to the surviving spouse, the nil-rate band is not used up if the deceased spouse died under the capital transfer tax or the inheritance tax regime, but if he died under the estate duty regime, he has essentially used up his nil-rate band. Consequently, if the first spouse died before 1972—there is also still an issue if he died before 1975—the surviving spouse is not able to benefit from the policy on the transferable nil-rate band.
That is not just a hypothetical case, as there are real examples. Mr. David Jackson raised that matter with his Member of Parliament, my hon. Friend the Member for Beckenham (Mrs. Lait), who wrote to the Financial Secretary on that point and raised the matter during the Budget debate in March. Mr. Jackson’s mother was widowed in 1969 and died in January 2008. In response to Mr. Jackson’s concern that the transferable nil-rate band would not be of benefit to his mother’s estate, the Financial Secretary said that the test is whether the deceased was the survivor of a marriage and whether there was any unused nil-rate band when the earlier death occurred. In those circumstances, Mrs. Jackson was the survivor, but there was no unused nil-rate band.
Another example is that of Dr. William Bain, who died in 1969, widowing his wife Elizabeth, who died in December 2007. Both of their sons have been in contact with hon. Members: Duncan Bain with my hon. Friend the Member for Chichester (Mr. Tyrie); and Edmond Bain with my hon. Friend the Member for Tatton. They have a letter from HMRC stating:
“There was no spouse relief available under Estate Duty Legislation and as such all transfers were chargeable.”
We are talking about a relatively small number of people. My hon. Friend the Member for Runnymede and Weybridge has tabled a parliamentary question asking how many cases there are in which the first spouse died before 1972, with the surviving spouse living in October 2007. I believe that the Treasury does not have an answer to that, in the sense that it does not know, rather than that it has not responded—I am sure that the Financial Secretary will correct me if I am wrong. Such cases do exist, and I have given a couple of examples to show that.
All members of the Committee will be somewhat sympathetic to those circumstances. Life has not dealt those families the best of cards, in the sense that most of the cases will involve wives who were widowed at a relatively young age and who lived on for many years. Having heard the announcement in October 2007, they could be forgiven for thinking that they would be able to benefit from their deceased husband’s nil-rate band. Of course, for technical reasons, there is no nil-rate band.
This is a question of fairness. It is unfortunate that this relatively small group of people appear to have been left out of the Government’s provisions. I am sure that that is unintentional. I hope that the Minister will look at the matter sympathetically to see whether we can perhaps address what appears to be an anomaly. I can see the logic of the Government’s policy, but a small number of widows and widowers will not be able to benefit from it.

Colin Breed: I want to emphasise the points made by the hon. Gentleman. There are examples and I have been sent one. I cannot put it more succinctly than Mr. Harvey, who writes:
“My mother died recently and I have been informed by HMRC that despite the new regulations introduced last year on nil-band transfer the executors of her estate cannot use the nil-rate band allowance from her deceased spouse (my father) who died in 1971. My father left everything to my mother but as they had some small savings and there was a house, albeit in joint ownership, the value of the estate was more than the then-limit of £12,500 and my mother, who only had a very small widow’s pension, had to find £850 to pay death duties at the time. HMRC admitted that now having to pay IHT on my mother’s estate is unfair but pointed out that they are only able to work from the regulations which were in existence at the time, ie Estate Duty rather than Inheritance Tax. Ironically, the only reason my mother’s estate will now be liable for IHT is because of the value of the house - the same one - which caused the initial demand for payment back in 1971.”
It is quite clear that others will find themselves in this situation. Although it is a relatively small number of people, as Mr. Harvey puts it:
“It seems particularly unfair for a generation who were frugal and careful with money to a degree almost unheard of today. I also presume that this outcome for what must be a group of mainly elderly widows was never actually intended as part of the new legislation.”
I am sure that that is the case. I hope that fairness prevails and I hope that the amendment will be given proper consideration.

Jane Kennedy: Amendments Nos. 44 and 45 are related to the inheritance tax rules for transfers to spouses who are domiciled outside the UK. As has been described, spouse relief is limited to the first £55,000 of assets transferred when the surviving spouse is domiciled outside the UK. This is a long-standing feature of the inheritance tax legislation. Amendment No. 44 seeks to operate the transfer of nil-rate band as if the limit for such transfers had not existed at the date of the first death. Amendment No. 45 seeks to disapply the limit for all transfers of assets to spouses domiciled outside the UK from April 2008 onward.
The restriction on the spouse exemption dates back to 1975, when the unlimited exemption for all other spousal transfers was first introduced. It is necessary to ensure that inheritance tax is not avoided through transfers of assets to their intended beneficiary via a non-domiciled spouse. Without the restriction an individual could easily transfer an unlimited quantity of assets to their non-domiciled spouse, who in turn could pass the—now offshore—assets back to the intended UK beneficiary without inheritance tax ever biting.
The potential cost to the Exchequer is hard to estimate but could be very substantial indeed. Members of the Committee with particularly long memories—I suspect that includes you and I, Sir Nicholas, and perhaps the hon. Member for Gosport—may recall that a similar amendment was tabled by the hon. Member for Bournemouth, West (Sir John Butterfill) during the passage of the Finance Bill in 1995. The Government of the day argued against the amendment for precisely the same reasons as I have just given.

It being One o’clock, The Chairman adjourned the Committee without Question put, pursuant to the Standing Order.

Adjourned till this day at half-past Four o’clock.